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Research on Employee Ownership, Corporate Performance, and Employee Compensation

Over the years, the NCEO has conducted and reported on research on employee ownership and corporate performance. The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much. The findings apply most clearly to closely held companies. The relationship between ESOPs and corporate performance in public companies is more ambiguous. Limited research on broad-based equity compensation plans have consistently found positive results. Studies on ESOPs and corporate performance in public companies come to more mixed conclusion.

ESOPs and Corporate Performance

The 2000 Rutgers Study

In the largest and most significant study to date of the performance of ESOPs in closely held companies, in 2000 Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales/employee by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. ESOP companies are also somewhat more likely to still be in business several years later. This is despite (or perhaps because of) the fact that ESOP companies are substantially more likely than comparable companies to offer other retirement benefit plans along with their ESOP.

Kruse and Blasi obtained files from Dun and Bradstreet on ESOP companies that had adopted plans between 1988 and 1994. They then matched these companies to non-ESOP companies that were comparable in size, industry, and region. They then looked for which of these companies had sales and employment data available for a period three years before the plan's start and three years after. The sales and employment growth data were then compared for each year for each paired company. They also checked the companies' filings with the Department of Labor to determine which of the companies had other retirement-oriented benefit plans. Finally, they looked to see what percentage of the companies remained in business in the 1995 through 1997 period.

The process yielded 343 ESOP companies and 343 pairs for the overall sample. However, missing data meant that employment data were available only for 254 ESOP companies and 234 pairs, 138 ESOP companies and 77 pairs for sales, and 115 ESOP companies and 65 pairs for sales/employee (some pair companies could be used for more than one ESOP company).

The results showed that ESOP companies perform better in the post-ESOP period than their pre-ESOP performance would have predicted. The table below shows the difference in the pre-ESOP to post-ESOP period for ESOP companies on sales growth, employment growth, and growth in sales per employee:
Difference in Post-ESOP to Pre-ESOP Performance
Annual sales growth+2.4%
Annual employment growth+2.3%
Annual growth in sales per employee+2.3%
It might be assumed that sales per employee would not go up by 2.3% per year since sales and employment growth differences were about the same, but, the researchers explain, the differing compositions of the samples for the measures makes such a simple comparison misleading. The relative growth numbers might seem small at first glance, but projected out over 10 years, an ESOP company with these differentials would be a third larger than its paired non-ESOP match.

The study, "Firm Survival and Performance in Privately-Held ESOP Companies," was published in Sharing Ownership, Profits, and Decision-Making in the 21st Century (Advances in the Economic Analysis of Participatory & Labor-Managed Firms, Volume 14), Emerald Group Publishing Limited, pp.109-124.

The 1986 NCEO Study

The first study to show a specific causal linkage between employee ownership and corporate performance was by Michael Quarrey and Corey Rosen of the NCEO. The study looked at the performance of employee ownership companies for five years before and after they set up their employee stock ownership plans (ESOPs). It indexed out market effects by looking at how well employee ownership companies did relative to competitors in the pre- and post-ESOP periods, then subtracted the difference. For example, if a company were growing 3% per year faster than its competitors in the pre-ESOP period, and 6% per year faster in the post-ESOP period, there would be a +3.0% difference attributable to the ESOP, other things being equal.

The study found that ESOP companies had sales growth rates 3.4% per year higher and employment growth rates 3.8% per year higher in the post-ESOP period than would have been expected based on pre-ESOP performance. When the companies were divided into three groups based on how participatively managed they were, however, only the most participative companies showed a gain. These companies grew 8% to 11% per year faster than they would have been expected to grow, while the middle group did about the same, and the bottom group showed a decline in performance.

Participation alone, however, is not enough to improve performance. A large number of studies show that the impact of participation absent ownership is short-lived or ambiguous. Ownership seems to provide the cultural glue to keep participation going.

The New York and Washington Studies

Economist Gorm Winther and colleagues in New York and Washington State followed up the NCEO study, using the same research design but different samples, one of 25 employee ownership firms in New York State and one of 28 employee ownership companies in Washington State. In both studies, employee ownership per se had little or no impact on corporate performance, but a substantial impact when combined with participative management. In Washington, companies that combined ownership and participation grew in employment 10.9% per year more than would have been expected. Sales grew 6% per year more. The New York results used correlations and cannot be compared directly, but the results were in the same direction. In Washington, majority employee-owned firms that were participatively managed did even better.

The Washington study also found that the synergistic effect of ownership and participation was not diminished even when the control group companies had no employee ownership, but had profit sharing and participation programs.

The GAO Study

In 1987, the U.S. General Accounting Office (GAO) did a before and after study using a similar methodology, but covering 110 firms and focusing on productivity and profitability. The measures the GAO used were controversial because they assumed that employee ownership firms did not increase overall compensation when they set up an ESOP. In fact, it appears that about half of all ESOP companies do increase compensation, and few decrease it. The GAO results are probably too conservative because of this assumption.

The GAO study found that ESOPs had no impact on profits, but that participatively managed employee ownership firms increased their productivity growth rate by 52% per year. In other words, if a company's productivity growth rate were 3.0% per year, it would be 4.5% after an ESOP.

The Brent Kramer Study

Although the study does not quite meet the standards for a quasi-scientific study, an intriguing analysis of 328 majority ESOP-owned companies by Brent Kramer in 2008 found that these companies had sales per employee that are 8.8% greater than comparable non-ESOP companies. 100% ESOP-owned companies did better than those that were over 50% but not 100%. Smaller companies and companies with greater ESOP account value per employee also did better. Employee influence on new products, work design, and marketing all were also strongly related to performance outcomes, with each one-point increase in worker influence on the combined measure of these three factors (on a five-point scale) leading to a $19,000 increase in the ESOP company sales per employee advantage,

The study does not demonstrate that having an ESOP per se causes these performance benefits because it is not a "before and after study." Its design cannot preclude the possibility that better-performing companies are more likely to have ESOPs in the first place. The correlates of performance, however, are less subject to this chicken-and-egg problem and provide useful insight into what makes an ESOP work, particularly in their very strong confirmation of the importance of employee involvement.

Kramer's study, "Employee Ownership and Participation Effects on Firm Outcomes," was his doctoral thesis for the City University of New York.

ESOPs, Corporate Culture, Profits, and Turnover

In "Does Linking Worker Pay to Firm Performance Help the Best Firms Do Better?," a 2012 working paper published by the National Bureau of Economic Research, Douglas Kruse and Joseph Blasi of Rutgers and Richard Freeman of Harvard conclude that "shared capitalist forms of pay are associated with high-trust supervision, participation in decisions, and information sharing, and with a variety of positive perceptions of company culture. At the firm level, shared reward forms of pay are associated with lower voluntary turnover and higher ROE [return on equity]. But it is the interaction between the mode of compensation and work practices and workplace culture that dominates the impact of shared capitalist pay on turnover and ROE." "Shared capitalism" is their term for ESOPs, broad-based individual equity compensation plans, and profit sharing. The study found that ESOPs have the most consistently powerful effects, followed by broadly granted equity plans.

The data was collected by the Great Place to Work Institute, the organization that produces the "100 Best Companies to Work for in America." It is perhaps the largest data base ever compiled on employee attitudes, organizational culture, and company outcomes addressing employee stock ownership. This is the first time the data have been made available to scholars. The NCEO worked with the Great Place to Work® Institute to make that happen. The data set includes the 780 firms that applied to the "100 Best Companies to Work For in America" competition from 2005 to 2007. All have over 1,000 employees and collectively employed over six million people. There were 305,339 employees surveyed. The data include both extensive survey results from 200-300 randomly chosen workers within each company and a workplace culture assessment conducted by the Institute for 400 of the companies. The researchers also gathered financial performance data on the roughly half of companies in the group that were publicly traded.

One-sixth of the companies had an ESOP and 9.1% were majority employee owned. That in itself is striking. ESOP companies, and especially majority ESOPs, are vastly overrepresented, both in applicants and winners, in these best companies to work for compared to their representation in similarly sized companies. The average proportion of shares held by the ESOP is 17.4%, but the median is just 5.9% because many companies are public.

ESOPs also significantly reduce turnover intention and are strongly related to employee perceptions of the degree of engagement and their perception that their company is a "great place to work." For instance, the regression coefficients for ESOPs and engagement scores indicate that having a majority ESOP increases the engagement scores and great place to work index scores by about 5% over what they would be absent an ESOP. That may not seem like a large number, but given that it is larger than any other variable in the model (profit sharing and options), it is significant. In explaining organizational behavior, a factor that accounts for 5% of the variation in its own, given all the many things that can affect behavior or are unpredictable, is very significant. Majority ESOPs had about that same 5% influence on turnover intention, again greater than any other factor.

On financial performance, the researchers were only able to look at public companies with ESOPs, which generally had very small plans (about 5% ownership). Majority-owned ESOPs are all closely held and financial data are not available. ESOPs had no significant independent effect on return on equity, but the combination of ESOPs, or other shared capitalism approaches, with employee engagement was 3.9% greater than for firms without this combination. Engagement alone, however, also had no significant impact.

ESOPs alone, like all the other shared capitalism measures, has a very limited impact of financial performance (as measured by Return on Assets) but, when combined with high employee engagement scores, has a significant impact.

Survey data form the 2002, 2006, and 2010 social surveys also shows that people who are employee owners are 40% to almost 50% less likely to say they will look for a job in the next year compared to non-owners.

The Impact of ESOPs on Employee Compensation and Unemployment


One reaction to the above findings might be that employee ownership companies do better because they substitute stock for wages or benefits. A 1998 study by Peter Kardas and Jim Keogh of the Washington Department of Community, Trade, and Economic Development, and Adria Scharf of the University of Washington shows that, in fact, employees are significantly better compensated in ESOP companies than are employees in comparable non-ESOP companies. Using 1995 employment and wage data from the Washington State Employment Security Department, and 1995 data on retirement benefits from a survey of companies and from federal income tax form 5500, the study matched up 102 ESOP companies with 499 comparison companies in terms of industrial classification and employment size. In terms of wages, the median hourly wage in the ESOP firms was 5% to 12% higher than the median hourly wage in the comparison companies, depending on the wage level of those being compared. The study found the average value of all retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of about $12,735. Looking only at retirement plan assets other than ESOPs, the ESOP companies had an average value of $7,952, compared to $12,735 for non-ESOP companies. Given that the typical ESOP is actually about 20% invested in diversified assets other than company stock, employees in ESOP companies would have had about as much in diversified assets as employees would have in all assets in non-ESOP companies. In ESOP companies, the average corporate contribution per employee per year was between 9.6% and 10.8% of pay per year, depending on how it is measured. In non-ESOP companies, it was between 2.8% and 3.0%.

Retirement Assets

In a 2010 project funded by the Employee Ownership Foundation, the NCEO did an extensive analysis of ESOP companies using data from the U.S. Department of Labor Form 5500 reports. Unlike prior research, the study carefully compiled data from multiple plans within a single company. It was also not a sample. We looked at every ESOP company for which data are available compared to all retirement plans.The study found that ESOP companies are more likely to offer a second defined contribution (DC) plan than non-ESOP companies are to offer any DC plan at all (56% compared to 47%. Considering only DC assets originally contributed by the company, ESOP participants have approximately 2.2 times as much in their accounts as participants in comparable non-ESOP companies with DC plans, and 20% more assets overall. The average ESOP company contributed $4,443 per active participant to its ESOP in the most recently available year. In comparison, the average non-ESOP company with a DC plan contributed $2,533 per active participant to their primary plan that year. In other words, on average ESOP companies contributed 75% more to their ESOPs than other companies contributed to their primary DC plan. Controlling for plan age, number of employees, and type of business increases the ESOP advantage to 90% to 110% above the non-ESOP companies in our sample.

The most consistent criticism of ESOPs has been that these plans are too risky as retirement plans. Data from the Department of Labor for retirement plans with 100 or more participants, however, show that ESOPs outperformed 401(k) plans in 15 of the 20 years between 1991 and 2010 and underperformed in only three (two were the same). They were also less volatile during that time as measured by standard deviation scores for the periods 1991-2000, 2001-2010, 2006-2010, and 2008-2010 (the ones analyzed.

The table below provides a summary of the findings:
Measure401(k) PlansESOPs
Mean Rate of Return7.8%9.1%
Standard Deviation
Source: Private Pension Plan Bulletin Historical Tables and Graphs, U.S. Department of Labor Employee Benefits Security Administration, November 2012

Job Stability

ESOP and broad-based equity plan companies are also less likely to lay people off. The 2014 General Social Survey found that 1.3% of employees with employee stock ownership were laid off in 2014 compared to a 9.5% rate for employees without employee stock ownership. In 2010, the numbers were 2.6 and 12.3%; in 2006, the numbers were 2.3% compared to 8.6%; and in 2002 12.1% and 2.6%. The estimated cost in saved unemployment benefits and foregone taxes to the federal government varied between $8 billion in non-recession years to $13 billion in recession years.

In How Did Employee Ownership Firms Weather the Last Two Recessions (Upjohn Institute, 2017), Fidan Kurtulus and Douglas Kruse looked at all publicly traded companies in the U.S. between 1999 and 2011. They divided the sample into those with ESOPs, as well as profit sharing and 401(k) plans with employer stock. They then looked at the average yearly change in employment for each sample. They found that when the unemployment rate increases by 1.0%, companies without any employee ownership reduce employment by 3%, but firms with any employee ownership by 2.8% and ESOP firms by 1.7%. Only the ESOP results are statistically significant. The higher the amount of employee ownership in the plans, the stronger the impact. Companies were also about 20% less likely to go out of business during the study period if they had an ESOP.

Impact on Millenials Economic Well Being

In Employee OwnershipEmployee Ownership and Economic Well Being Nancy Wiefek, Ph.D., National Center for Employee Ownership 2017 analyzed data from the The National Longitudinal Surveys (NLS), sponsored by the U.S. Bureau of Labor Statistics. Suppport for the project came from the Kellogg Foundation. The NLS surveys are nationally representative surveys that follow the same sample of individuals from specific birth cohorts over time. The content of the survey covers nearly every aspect of the labor market experience of workers, including wages, income, wealth, and benefits. The data are described in more detail in the appendix.1 This report uses data from a sample of 5,504 women and men, including an oversample of African Americans and Latinos, first interviewed in 1997. All the respondents were ages 28 to 34 when interviewed most recently in 2013. This report uses data from a sample of 5,504 women and men, including an oversample of African Americans and Latinos, first interviewed in 1997. All the respondents were ages 28 to 34 when interviewed most recently in 2013

The study surveys ask respondents if they are in an employee stock ownership plan. We believe most of the respondents are in ESOPs, but a small percentge may conflate this with some other kind of plan, even tough the survey contins a definition. The study finds that millenials do significantly better in terms of income, wealth, access to benefits, and retirement assets if they are in an employee ownership plan. These relationships persist across demographic groups and over time, and in statistical models that control for other demographic factors. Over-time analysis demonstrates that the two groups start out at the same modest level of wealth. Multivariate regression analysis shows that employee ownership is significantly related to higher wages after controlling for other strong predictors, including education, race, gender, and marital status. Employee ownership is strongly predictive of longer job tenure controlling for these factors and wages. Longer job tenure is in turn strongly predictive of household wealth.

The study looked at a broad range of categories of respondents and economic well-being measures. Below are just a few of the highights.

Median Income
Overall $40,000 $30,000
Single women $31,000 $25,000
Workers of color $35,000 $27,000
Under 50k income from wages $30,000 $25,000
Median Net Wealth
Overall $28,500 $14,831
Single women $9,089 $6,000
Workers of color $16,450 $9,175
Under 50k income from wages $16,250 $11,000

Access to Benefits at Work
Medical, surgical or hospitalization insurance which covers injuries or major illnesses off the job 97%97%67%
Dental benefits 94% 60%
Paid maternity or paternity leave 65% 31%
Company provided or subsidized childcare 23% 5%

Public Companies and ESOPs

In their 2008 study cited above Kim and Ouiment of the University of North Carolina also found that ESOPs have a positive effect on company value. Using Tobin's Q, a ratio of the company's stock value to its book equity value), they found that ESOPs led to an 8.12% increase in company valuation relative to the industry median. Companies with ESOPs with less than 5% ownership showed a valuation increase of 16% relative to the industry median; companies with larger ESOPs showed neither an increase nor a decrease. The impact of company value is positively correlated with greater leverage, perhaps because companies are keeping overall compensation costs more neutral.

To conduct their study, Kim and Ouiment studied public companies with ESOPs between 1980 and 2004 for which they could determine an adoption date and for which there was sufficient before and after data to conduct analysis over a significant time period. They found 756 public ESOPs during this time, but had the needed data for 418.

For the first time in ESOP studies, the researchers used the Standard Statistical Establishment List of the Bureau of the Census. The list provides detailed data on all forms of compensation, including ages, benefits, leave policy, severance pay, etc. From this, the researchers computed a measure of total compensation and benefits. These data were then paired with Compustat data on company performance. They analyzed performance for five years before and 10 years after the ESOP was set up, excluding the year of adoption, with a shorter time line for some of the sample companies for a minority of the companies.

In "The ESOP Performance Puzzle in Public Companies," published in the fall 2006 issue of the Journal of Employee Ownership Law and Finance, Robert Stretcher, Steve Henry, and Joseph Kavanaugh looked at 196 publicly traded U.S. ESOP companies during the years 1998 through 2004. Each ESOP company was matched to a comparable non-ESOP company. This is one of the few public company studies to use the more methodologically rigorous matched-pair technique. The ESOP companies had returns on assets that were higher than the matched non-ESOP companies in all seven years, net profit margins that were higher in all of the five years where comparable data were available and better operating cash flows in three of the five years where data were available. The authors present the data for each year, rather than as a single summary measure. Below, we show our own calculated mean of the difference for the years in question:

Return on assets: +5.5%
Net profit margin: +10.3%
Operating cash flow to assets: +.0.1%

On several other measures, the differences achieved statistical significance in less than a majority of the measured years. Keeping in mind, then, that the differences reported may be the result of chance, we can calculate the means of the differences year-by-year for each of these measures:

Return on equity: +5.6%
Sales growth rate: -0.8%
Market-to-book ratio: +0.8%
Debt ratio: -2.9%
Operating cash flow to sales: +0.4%
Operating cash flow per employee: +5.7%

In "When Labor Has a Voice in Corporate Governance" by Olubunmi Faleye, Vikas Mehrotta, and Randall Morck (National Bureau of Economic Research Working Paper, No. 11254, 2005), the authors looked at 225 public companies with 5% or more of the company's stock held by an ESOP. They found that productivity, Tobin's q (a ratio of the market value of a firm's securities to the replacement costs of its tangible assets), long-term investment, operating risk, and growth were all worse in employee ownership companies than non-ESOP public companies. The median Tobin's Q for ESOP companies, for instance, was .0975 and for non-ESOP companies 1.026. The median annual sales growth was 5.7% for ESOP companies compared to 8.7% for non-ESOP companies. Total factor productivity for ESOP companies was -.032 compared to .5 for ESOP companies. The study looked at 100 ESOPs and 115 companies with other plans; plans had to be in place for at least five years prior to 1995. Data were gathered for 1995 through 2001. Generally, the ESOP companies performed less well than the non-ESOP comparison.

The authors argue that "labor voice" causes the underperformance, as workers would vote their shares to favor policies that underspend on investment, research, and development so as to increase current wages. They do not specify just how participants in these plans could possibly do that, given that they would normally only vote for board members and auditors, often do not vote at all, rarely vote with much unanimity and, in any event, are typically voting for a slate of directors that has no meaningful opposition.

There is also an important question of whether the employee ownership plans are overrepresented in underperforming industries. The authors do not control for this variable, although we know that the airline, steel, and banking industries were heavily overrepresented among public company employee ownership plans during the study period. The authors do control for prior economic performance (the five years prior to the employee ownership plan), but in the airline and steel industries, the entire industry suffered severely shortly after these plans were instituted. The plans were created, in both cases, as the industries were still in reasonable financial health, but facing potentially severe future problems, problems that, in fact, led to the demise of many companies in both sectors. In both cases, the plans held ownership stakes much larger than the normal plans.

Nonetheless, the findings appear robust enough to lend support to the argument that just setting up an employee ownership plan does not improve performance and can harm it if not coupled with an ownership culture.

A 1999 study by Hamid Mehran of Northwestern University for Hewitt Associates found that ESOPs in 382 publicly-traded companies increased the return on assets (ROA) 2.7% over what would otherwise have been expected. The study looked at the companies' financial returns for two years prior to the plan's implementation and four years after. Each company was compared to industry norm ROA figures for both periods. Mehran also found that for the 303 ESOP companies surviving the entire four year post-ESOP study period, ROA was 14% higher than the comparison group scores, while for the 382 companies as a group, ROA was 6.9% higher for the four-year period. Over 60% of the companies experienced an increase in their stock price in the two-day period following public announcement of the ESOP, with the average increase for all companies at 1.6%. This suggests that the stock market now reacts positively to ESOPs, a change from the pattern in the 1980s when ESOP announcements were often seen as an indicator that a company was trying to prevent a hostile takeover.

Other studies look at before and after results, with mixed conclusions. Donald Collat, in a 1995 study, found that public companies that did not set up their ESOPs in response to a takeover threat saw their operating margins improve 2.1% per year compared to their pre-ESOP performance. The study looked at companies for three years before and after the ESOP, indexing for market effects. Takeover threat ESOPs, however, saw a decline of 3.3%. In a 1996 study, Mary Ducy, Zahid Igbal, and Aige Akhigbe found that ESOP companies show a decline in operating cash flow of .2% to 2.1% in post-ESOP performance, also using a three years before, three years after measure, and again indexing for market effects. While these are the most thorough of several studies on public company ESOPs, others come to a similarly mixed conclusion.

Finally, a 1998 study by Margaret Blair, Douglas Kruse, and Joseph Blasi found that companies that are publicly traded and at least 20% or more owned by an ESOP are more organizationally stable than comparable non-ESOP companies. Looking at companies between 1983 and 1996, the study found that 74.1% of the ESOP companies remained as independent operations while only 37.8% of the comparison companies did (these figures changed to 59.3% and 51.1% for the period 1983 through 1997, however). None of the ESOP companies went bankrupt, but 25% of the comparison companies did.

These mixed results are probably explained by three factors. First, a 1997 NCEO study found that public companies generally seem to view employee ownership solely as a benefit plan, not part of an explicit organizational culture, as many closely held companies do. Second, ESOPs in public companies tend to own a much smaller percentage of company stock than ESOPs in closely held companies. Finally, in many cases, public company ESOPs simply replaced existing plans where the company contributed company stock to a 401(k) plan. Now the company used an ESOP to make this contribution instead. Hence, the "before" was really not much different from the "after," so not much could be expected to change.

Broadly Granted Stock Options and Corporate Performance

One of the most comprehensive and convincing studies to date on the effect of broad-based option plans on company performance was by Yael V. Hochberg of the Kellogg School of Management at Northwestern University and Laura Lindsey at the W. P. Carey School of Business at Arizona State University. They found that companies that granted options broadly to their employees showed a significant improvement in industry-adjusted return on assets (ROA) while companies that granted options more narrowly showed a decline in performance. The study, "Incentives, Targeting and Firm Performance: An Analysis of Non-Executive Stock Options," appeared in the November 2010 (Vol. 23, No. 11) issue of the Review of Financial Studies.

The primary data source for the study was the Investors Responsibility Research Center (IRRC) Dilution Database. That contains company option plan information collected from public filings for firms in the S&P 500, S&P midcap 400, and the S&P small cap 600. The study period was from 1997 through 2004. The identification of companies with broad grants is inferential. Following prior researchers, they identify companies where the bottom 90% of the workforce gets half the option value, after making certain adjustments. This complex calculation cannot assure that the data set they are using is entirely composed of companies that actually grant options to more than half their work force (the definition of broad-based used by other studies on this topic). They identify 44% of the companies as having broad-based plans by this definition.

Looking at non-executive options and the subsequent firm operating performance as measured by the firm's industry adjusted return on assets (ROA), the authors found that "both the existence of a broad based option plan and the implied incentives of an option plan exert a positive effect on firm performance... holding all other variables constant, a move from the 25th percentile of per-employee delta [that is, increased option grants per employee] to the 75th percentile of per employee delta implies an increase of 0.17% in ROA and a 0.15% increase in cost-adjusted ROA. The effect we estimate is approximately a 0.4 percentage point change in industry-adjusted ROA for every $1000 increase in per employee delta. Since the average per employee delta in our sample is about $760, a $1000 increase represents a little over a doubling of pay to performance sensitivity."

By contrast, companies with grants focused on executives did worse: "for both performance measures, the coefficient on aggregate option incentives for firms with broad-based option plans is positive and statistically significant and the coefficient on incentives for firms without broad-based plans is negative." The relation between incentives and performance was confined to smaller firms in the bottom half of total employment, however. The authors also segmented the companies into those where an increase in the share price had a potential impact on option values above and below the median amount. Companies with this greater leverage opportunity do significantly better.

The authors examined a number of potential alternative explanations for the results, such as region, research intensity, and the ability of broad-based option companies to attract and retain better employees. They found no evidence for any of these factors, however, and hypothesize instead that it must be that employees are monitoring other employees' behavior more.

In "The Option to Quit: The Effect if Employer Stock Options on Turnover Intention," Serdar Aldamatz, Paige Ouimet, and Ed Van Wesep of the Kenan-Flagler Business School at the University of North Carolina found that broad-based stock option plans reduce employee turnover, especially where industry returns are increasing. The study was based on U.S. Census employment data as well as data on firm performance from Compustat and other sources. Only publicly traded companies were analyzed. The presence or absence of a broad based plan was inferred from the difference between options granted to all employees and options granted to top executives. While an imperfect measure, if anything, it introduces a conservative bias because some plans are being considered broad-based that are not, thus watering down the correlations that the researchers found.

The findings show that turnover over three years is lower in broad-based plans, even when controlling for comparison companies without these plans. The most dramatic effect, however, is among companies in high-performing industries. Research shows that, logically enough, employees are much more likely to look for a new job if their industry performance is strong, leading to higher turnover during periods of strong industry stock market performance, on average. However, for firms with broad-based option plans, the relation is reversed. Firms with broad-based option plans plans do not realize higher turnover during periods of strong industry stock market performance because it is exactly at these times when the broad-based option plans shares are especially valuable and the strongest deterrent to involuntary turnover. In industries with a 10% over-performance, for instance, broad-based options reduce turnover by 20%, relative to averages. (Average quarterly turnovers is 6.6% across the sample. If industry stock returns are 10%, quarterly turnover at non-broad-based option plans firms increases to 7.09%, on average. But quarterly turnover decreases to 5.82% in companies with plans, on average). There is a positive effect even in weaker performing industries, but it is small.

The turnover findings mirror those from the study "Does Linking Worker Pay to Firm Performance Help the Best Firms Do Better?", a 2012 working paper published by the National Bureau of Economic Research, Douglas Kruse and Joseph Blasi of Rutgers and Richard Freeman of Harvard. The methodology for this project is described above in the ESOP section, where its results on ESOPs are detailed.

The study found that of the 44.5% of the 780 firms applying for the 100 Best Companies award that grant stock options, the average percent of employees receiving stock options was 20.6% while the median was 6.5%. Three quarters of the firms gave options to less than 25% of employees while 16.4% (7% of the total sample) of the companies were broad-based and gave stock options to more than half of their employees. Companies that grant options to 25% to 49% of their employees have about a 2% lower intention to turnover, while in the other two categories, the effect was negligible. There was no substantial effect on company performance from options alone, but the combination of options and engagement plans did result in modest improvements in return on assets.

In "Executive and Broad-Based Stock Options: Evidence From U.S. Panel Data," Rutgers University Working Papers (2005, James Sesil and and Yu Peng Li looked at 291 companies with broad-based option and executive option plans for which a start date could be identified for both plans (these dates could be different). They then looked at productivity, growth, and capital intensity changes for three years before and after the plans' start dates.

The table below provides the results for productivity, growth, and capital intensity in terms of the mean changes before and after the plans. Generally, the executive-only plans would have been established well before the broad-based plans.

Mean productivity, growth, and capital intensity changes in three years before and after plan introduction

VariableBroad-based plan, before adoptionBroad-based plan, after adoptionExecutive-only option plan, before adoptionExecutive-only plan, after adoption
Output/employee in dollars$265,575$318,925$231,188$403,071
Capital intensity (million $)$1,497.0$1,915.0$1,428.4$4,563.9
The table indicates that the impact of the two kinds of plans was positive in each case, with more of a productivity impact from executive plans. The researchers found that the impact of broad-based plans occurs primarily immediately after the plan's introduction then levels off over five years. Executive-only plans, however, show continual improvement over the period. The researchers suggest, however, that this may be because executive plans tend to award grants annually or more often, while broad-based plans often make awards either only once or at periods less than annually. They did not assess how frequently this pattern occurs, but anecdotally, the NCEO would estimate that only about half the broad-based plans would provide annual and bi-annual grants during this time frame (they have become more common in recent years). Sesil and Li suggest that the continual reinforcement of regular grants may be critical to the incentive effect.

In "Broad-Based Stock Options Before and After the Market Meltdown" (Rutgers Working Papers, 12006) by James Sesil and Maya Krumova, the authors used the same data set for the other studies in this series to evaluate companies with broad-based options in 1998 and 2000. The study looked at two issues: 1) would stock options be less effective in times of declining share prices than rising prices? and 2) does the effectiveness of broad-based stock options depend on the size of the company (specifically, do employees react more positively in smaller companies where their individual efforts have a more visible effect)?

To analyze this issue, data were analyzed only for companies that provided stock options to 50% or more of their non-management employees and were in business from 1995 through 2002. From this, two datasets were created, one of 463 companies for 1995-1997, a period of rising stock prices, and one of 367 companies for 2000-2002, a period of falling prices. Companies were then classified as small (under 500 employees), medium (500-5,000), or large (over 5,000). Using data from Compustat, the researchers matched the broad options companies with comparable companies in their 2-digit SIC codes. Because the researchers could not know when the plans were established, they used a technique called a random effects estimator to correct for any bias these omitted data might introduce (this is a statistical technique used with panel data in a time series that allows corrections for certain missing data).

In the 1995-1997 period, they found that companies with broad-based options had productivity levels 20% to 33% higher than comparable firms. The smallest companies and largest companies registered at about a 20% differential; medium sized at 33%. In 2000-2002, medium and large-sized companies retained these differentials; the small company differential declined just over than 1%.

The results indicate that the declining stock market did not undermine the impact of broad options. Moreover, contrary to popular perception that the incentive effects of options should be lower in larger companies (because individual employee efforts seem to matter less), company size does not seem to be consistently related to performance.

One of the largest studies on this topic was a 2000 study by Douglas Kruse, Joseph Blasi, and Jim Sesil of Rutgers University, and Maya Krumova of the New York Institute of Technology, using data provided by the NCEO. The study was published in our book Stock Options, Corporate Performance, and Organizational Change (now out of print).

The study sample was drawn from the 1998 NCEO Current Practices in Stock Option Plan Design study. That study sent surveys to 1,360 companies that were identified as possibly having broad-based option plans, which we defined as plans in which more than 50% of full-time employees would actually receive options. We received 141 responses. For the Rutgers study's purposes, 105 companies provided usable data. The authors used a before and after approach to the data to reduce or eliminate sampling bias issues.

Results were based primarily on the 91% of the sample companies that were publicly traded. Data were gathered on productivity, return on assets, Tobins Q (a complex financial measure of return on assets that produced similar results to the return on assets measure and is not reported here), and total shareholder return. These were then compared to all non-broad based stock option companies in their industries of similar size (the full sample group) and to paired comparisons of matched non-broad based stock option companies (the paired sample).

Because few companies had discrete plan start dates early enough to perform a comprehensive before and after analysis, the researchers, as a substitute, analyzed companies in the period 1985-87 and 1995-97, reasoning that few, if any, of the companies had option plans in the earlier period and most had them in the later period. Comparisons were made with non-stock option companies for the two periods and the difference subtracted. In effect, the earlier period results provide a baseline to measure the performance in the later period. If a stock option companies had productivity 3% greater than its peers in the earlier period and 6% greater in the later period, than it could be argued that the plan improved relative performance on this measure by 3%.

The study found that productivity rates did improve with the institution of a plan. The difference between productivity scores from the for the overall sample from the pre-plan period (1985 to 1987) to the post-plan period (1995 to 1997) was 14.8% when the comparison group was all non-option companies and 16.8% when looking just at paired comparisons. Sampling error can be strongly rejected as an explanation for these results.

Return on assets showed a similar pattern. Here the stock option companies showed an improvement of 2.5% on ROA relative to the full sample in the post-plan period compared to the pre-plan period. When just paired comparisons are used, the improvement was 2.05%. Again, sampling error is very unlikely to have caused these results.

Total shareholder return, however, showed no statistically significant difference in the relative performance during the two periods, meaning any measured change could simply reflect random sampling error. The researchers thus believe that the any value consequences of dilution caused by broad-based options seems counterbalanced by increased productivity.

Looking simply at how the companies did in the period 1992 to 1997, without trying to adjust for market effects, a similar pattern emerged. Productivity growth was 1% per year greater and return on assets 5.8% greater, but shareholder return was not statistically distinguishable.

In "Non-Executive Employee Stock Options and Corporate Innovation," by Xin Chang, Kankang Fu, Angie Low, and Wenrui Zhang (Midwest Finance Association 2013 Annual Meeting Paper, 2013), the authors find that companies with broad-based stock options receive significantly more patents than companies without such options. The authors use the same methodology as Lindsay and Hochberg (see above) for estimating which firms have broad-based options. They look at the S&P 1500 for 1997 through 2005. Companies with broad-based plans tend to be younger and smaller. Companies that score higher on the KLD Employee Treatment Index and granting broad-based options (a measure of how well employer treat employees on a variety of issues) show a synergistic effect on patent generation. The study controlled for a large variety of factors, and ultimately concluded that moving from the 25th percentile to 75% percentile in the value of options to non-executives increased the measure of patents received by about a factor of two, while grants to top executives showed only an increase of a few percent.


Researchers now agree that "the case is closed" on employee ownership and corporate performance. Findings this consistent are very unusual. We can say with certainty that when ownership and participative management are combined, substantial gains result. Ownership alone and participation alone, however, have, at best, spotty or short-lived results.

Sources for Future Research

If you want to do further research in the area of employee ownership, the NCEO maintains a variety of useful data sources. For details, go to the article on the site NCEO Data Sources of Employee Ownership.

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